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USC IR 324 - IR 324 Notes

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8/25- MNC: multinational corporation with facilities and assets in other countries other than their own origin- Enterprise operating in several countries (at least 2) but managed from a home country- Derives at least one quarter of its revenues from outside of the home country- Ex.) Apple, Nike, Amazon, oil companies, automobile companies, banks (financial services), CVS Health- Ways to measure the size of an MNC:- Revenue: sales, income of the MNC’s business activities- Tied to profit (revenue - sales)- Market Capitalization: total value of a company’s shares- Market Valuation: estimate of what it would be worth of it were sold, better measurement for companies not publicly traded- Employees- Ex.) Walmart measured by employees- Capital Invested- Market Share- Current market evaluation due to pandemic- Health services increases- Gas decreases- Related to less driving/alternative automobiles (electronic)- Caves: Types of Multinationals- Four categories:- Multinational, decentralized corporations with a strong home presence- A global, centralized corporation that acquires cost advantage through centralized production wherever cheaper resources are available- An international company that builds on parent companies technology and R and D and disseminates it throughout its network abroad- Ex.) Uber- Anyone who combines these three approaches- Horizontally Integrated Production vs. Vertically Integrated Production- Caves: three types of companies (variable = nature of the production)- Horizontally Integrated Production: produce the same basic product but inmultiple locations, largely for sale and consumption near the reproduction plant- Ex.) Coca Cola, auto industry- Vertical Integrated Production: the supply chain for the items is owned by the parent company- The production chain is held in multiple nations & the production units lie in different nations- Ex.) Apple and its production at FoxComm as well as opening its own production plans both in San Jose and in Taiwan- Diversified MNE whose outputs are neither vertically nor horizontally integrated- British East India Company- One of the first LLC’s & gave power to gather resources for government corporation- British Gov. gave limited liability to the company’s investors- Unlimited liability = if company took on losses, creditors could come after anything the investors owned in order to pay for it- Limited liability = investors can’t bankrupt them- Dutch & Portuguese Companies could rely on their national navies to ensure shipping- Highly controversial- Adam Smith called the Company a “bloodstained monopoly” for its massacres & violence in Bengal- “Tight-Loose Management”: tight controls & detailed instructions, and required allemployees to post a large bond to ensure their loyalty- Tight at the centre, but loose & entrepreneurial at the edges- Rules:- EIC transformed into a diplomatic & military operation- “Sepoy Mutiny”, Anglo-Indian War- Caused by the Company due to religious differences- British & Indian mutineers slaughtered many- Replacement of Company Rule with Crown Rule- British Gov. suffered the consequences of taking control of Indians- Company set the stage for colonialism8/30- FDI: Foreign Direct Investment, when the MNE directly invest in a nation- Physical Capital: actually build production means like factories- Financial Capital: investments in monetary form without the ownership of the physical assets- Host Government: the country that received the foreign direct investment- Home Government: the government of the MNE’s headquarters; often where it began but not necessarily- Caveats:- The firms the economists are examining are horizontally integrated production, rather than vertically integrated- The authors admit the data set is fundamentally American- This raises the issue of the international validity of findings- Or is it merely examining American companies??- IOW, how universal are the American experiences of these MNE’s??- FDI or export?- Whether the company should invest abroad & create their products abroad- OR should they produce them in the home country & export the goods- Core Findings:- Tiny minority of firms engage in international trade- Smaller fraction of firms own production facilities in more than one country- Largest & most productive companies choose to go abroad- Chicken & egg argument- Are they large because they go abroad, or do they go abroad because they are large?- The latter seems to be more common- As a host country becomes more attractive to multinationals, it attracts progressively smaller and less productive firms- The impact of these new firms is less than the first movers- Firms that are diversified are much more likely to engage in horizontal FDI abroad- MNE’s seek out similar economic systems- These can also mean political allies, based on democratic peace theory AND economic interdependence theory- Yeaple’s critique: not economic similarities but instead effective demand for the product produced- Not necessary lower administrative barriers to entry that affect the MNC decision for FDI- ex.) amount of western investment in China- “Race to the bottom” of restrictions is more of a political rather than an economic argument- Labor protections, environmental regulations, tax burdens- Core research question: Is FDI a sign of strong political relationships or does it create them?- Investment is a sign of alliance- FDI or Export?- Liability of foreignness- Can the company be assured that their investment is protected & will not face expropriation from the host government?- Tax codes, production codes, et al- Can the company reproduce its production model abroad?- What local laws and regulations may complicate this reproduction?- Local alliances and subsidiary arrangements- Large MNE’s tend to buy their local competitors and then integrate them into their supply network, rather than reproducing their productions- AKA heterogeneity- Country characteristics- The size of the market (Yeaple)- The nature of the politics- Political structures- Political culture & climate- Implications:- FDI leads countries to standardize practices & economic policies- Companies are huge contributors to this process- They do so to ensure their investment is better protected- Reactive or progressive?- Companies tend to react to political developments more than promote them- Not universally true- How much do MNE’s contribute to the economic interdependence arguments to


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